Property and the Law: Protecting Purchasers from a Seller's Tax Liability

With the enactment of this new statutory provision, the State of New Jersey's Division of Taxation imposes an obligation on the purchaser (or any transferee or assignee) of any bulk sale transfer (including a sale, transfer or assignment) to notify the Director of the Division of Taxation of the proposed sale and the price, terms and conditions thereof, at least 10 days before taking possession of the subject property or paying therefore. This obligation of a purchaser to notify the Director applies whether or not the seller (or transferor or assignor) has represented to, or informed the purchaser that the seller owes any State tax and whether or not the purchaser has knowledge that such State taxes are owing and whether any such State taxes are in fact owing.

The statute goes on to provide that any purchaser in a transaction constituting a bulk sale transfer who fails to follow the requirements of this new statute shall become "personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller." As a result, all purchasers of commercial real estate in New Jersey must be sure to strictly adhere to the requirements of the new statute, and include language in their real estate contracts ensuring that the Seller does the same, in order to avoid any potential liability for a seller's State taxes.

The new statute provides, in pertinent part:

"Whenever a person ["person" includes an SPE or other legal entity] shall make a sale, transfer, or assignment in bulk of any part or the whole of the person's business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall, at least 10 days before taking possession of the subject of the sale, transfer or assignment, or paying therefore, notify the director . . . of the proposed sale and of the price, terms and conditions thereof …. Within 10 days of receiving such notice, the director shall notify the purchaser, transferee or assignee . . . that a possible claim for State taxes exists and include the amount of the State's claim."

Provided the Director informs the purchaser that a possible claim for such State taxes exists, the State is given a first priority right and lien over any sums of money, or other consideration, which the purchaser would otherwise be required to transfer to the Seller, to the extent of the State's claim, and the purchaser is forbidden to transfer such sums to the seller. The Purchaser shall provide for such sums to be held in escrow from Seller's proceeds at closing until such time as the State makes a final determination as to the amount of any State taxes owed by the seller.

In order to protect themselves from personal liability under this statute, New Jersey commercial real estate purchasers should adhere to the following steps:

1.Be sure to include a provision in the contract of sale that both purchaser and seller are required to fully comply with the provisions of N.J.S.A. 54:50-38, including but not limited to (i) purchaser filing, at least 10 days prior to closing, the required Notification of Sale, Transfer, or Assignment in Bulk with the Director of the Division of Taxation, (ii) withholding from Seller's proceeds at closing an amount equal to the amount stated in the Director's notification of the State's claim, which sum shall be held in escrow until the State makes a final determination as to the amount of any State taxes owed by Seller, (iii) requiring Seller to post such additional amounts as required to fund the escrow if the amount of Seller's net proceeds are insufficient, and (iv) upon the State's final determination of State taxes owed by Seller, providing for the payment of same from the escrow (and if the escrow is insufficient, requiring the Seller to pay the difference.)

2.File the required Notification of Sale, Transfer, or Assignment in Bulk with the Director of the Division of Taxation, by overnight delivery or registered mail, at least 10 days prior to your scheduled closing. As a practical matter, be sure to obtain all information pertaining to the Seller sufficiently in advance of this 10-day filing deadline so you are not delayed in filing the form due to missing seller information.

3.Establish an escrow at closing equal to the amount of any State claim as set forth in the Director's notification of a potential claim.

The Notification of Sale, Transfer, or Assignment in Bulk form and instructions for completing the form are available on the Division of Taxation's website.

Allen J. Popowitz is a partner in WolfBlock's Real Estate Practice Group in Roseland, NJ. He can be reached at apopowitz@wolfblock.com. Edward J. Bruton, Jr., an associate in WolfBlock's Real Estate Practice Group contributed to this article.